Is the pharma sector on the road to regaining its mojo?

Analysts believe the pharma industry is sitting on the verge of a turnaround in its fortunes.

There is excitement among analysts about the prospects of the pharmaceutical sector. Yet, the sector has been a consistent underperformer in recent years, which makes investors sceptical of its ability to regain its past strong footing.

The pharma sector enjoyed its days of glory in the first half of the 2010s, when the US generics space was flourishing and bringing in strong chunks of revenue for domestic drugmakers. However, over the years, the US generics space got caught in multiple headwinds, which, coupled with the lack of initiatives by Indian pharma companies to diversify their businesses, became a drag for the sector.

The lack of investments in research and development (R&D) and attempts to build a niche, less competitive portfolio became a stress point for pharma players in India post-2015, a time when the US generics segment saw a slowdown in growth.

R&D and China+1

Nonetheless, better late than never, pharma companies have finally woken up to the need to make R&D investments and explore niche products. Not to mention the growing China+1 sentiment that has also improved growth prospects for the sector.

Major pharma companies like Sun Pharma, Cipla, and Dr Reddy's Laboratories are going big on their R&D initiatives, trying to enter niche products that face less competition and are less prone to price erosion pressures. Sameer Kolhe, founder of Maypharm Life Sciences, who has closely worked in the pharma sector for around two decades, said that he's seeing a change within the sector.

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"Companies are now putting up facilities for the manufacturing of complex products and collaborating on R&D. The government is also supporting the industry through its production-linked incentive (PLI) scheme, which means we will now be less dependent on China in a few areas," he added. Easing raw material prices have also reduced pressure on margins for these drugmakers, giving them more leeway to increase R&D investments.

Several companies within the sector are also diversifying their presence across new geographies to reduce their reliance on the US market. The robust growth outlook for the domestic pharma market also presents all the necessary ingredients for a turnaround in the sector.

Analysts' take

The China+1 sentiment has triggered a shift in focus from China to India, which is likely to trigger a change in pharma leadership in the coming years. Despite being known as 'the world's pharmacy', the Indian pharmaceutical sector lags behind that of China, and that too by a huge margin. But Saurabh Mukherjea, Founder and Chief Investment Officer of Marcellus Investment Managers, believes that a major trade flow change is underway in the pharma sector.

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Mukherjea anticipates a change in outlook for active pharmaceutical ingredient (API) companies like Divi's Labs (the world's fifth-largest and India's largest API company), going by their management commentary and client views. On the other hand, Mukherjea highlighted the stark contrast in the outlook for WuXi Biologics, China's largest API manufacturer, which is turning weak.

"Clients of WuXi Biologics revealed that the US government is reluctant on drug companies giving business to China's largest API manufacturer," Mukherjea pointed out, justifying the changing trend within the pharma industry.

Furthermore, the government is not just pushing for more investments by giving benefits through its PLI scheme but also making an attempt to tighten regulations.

Recent news of fatalities in some foreign countries following the use of drugs manufactured in India have dented the name of the Indian domestic pharma players and the government is pushing to clean up the image by tightening regulations for the industry. Analysts also believe the step is a much-needed one.

Adding to that, the reasonable valuations of companies within the sector, especially when most pockets in the market are expensive, are also helping pharma companies.

Sham Chandak, Head of Institutional Broking at Elios Financial Services, remains bullish on the pharma sector, as he believes the space will likely regain its mojo soon. "Several tailwinds for the sector suggest that pharma is set to outperform the rest of the market over the next 12 months," Chandak said.

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